Supply chain management key to profitability of Indian online retailers

Online retailers in India need to build stronger and more efficient supply chains to cut operational costs, meet customer demands on shorter deliver times and improve their profitability, according to a report released by global management consulting firm AT Kearney.

In order to pursue a profitable model, Indian online retailers need to provide superior delivery experience to customers at an efficient cost

Titled “Profitable Growth for E-tailers: Managing Fulfillment on a Tightrope”, the report highlighted that online retailers in India are rapidly scaling up their supply chains to try and meet growing demands from customers for shorter delivery times but at a sub-optimal cost. This is big issue for the sector as India’s e-fulfillment industry is expected to be worth US$5 billion by 2020.

The online retail market in India has grown at a phenomenal rate. It expanded at a compound annual growth rate (CAGR) of 77 per cent between 2012 and 2015. However, the increased competition in the sector is forcing many companies to create excess capacity as they try to win a larger share of customers. This adversely increases costs, hurts efficiency and puts profitable growth out of reach.

“One of the biggest factors that has driven the growth of online retail is convenience. Our study found that 60 per cent of buyers in India purchase online because of convenient delivery. Online retailers clearly recognise this factor and have been pushing to shorten the delivery times. However, often this is done at a high cost to the company,” said a Partner with AT Kearney India, and a co-author of the report, Himanshu Bajaj.

“In order to pursue a profitable model, Indian online retailers need to provide superior delivery experience to customers at an efficient cost. Based on our experience in the region, we have devised a supply chain approach that can reduce overall costs by up to 30 per cent and cut delivery times by one to two days without compromising scalability,” he added.

Each of these has specific benefits for the supply chain. For example, by optimising the fulfillment network design and having a network of fulfillment centres spread strategically across eight cities, an online retailer could provide next-day delivery to 70 per cent of India’s population. Right adoption of automation and right scalability principles can also deliver up to 50 per cent lower cost of operations in fulfillment centres and sorting hubs.

“The online retail industry is entering a new phase as valuations of online retail start-ups are now being based on current business models, as opposed to gross merchandise volume,” said a Partner at AT Kearney India, Kaushika Madhavan.

“As a result, online retailers will have to focus on profitability. One of the ways to do this is to have a more efficient supply chain. The problem with India online retailers is that a large number of them have built their supply chains in a manner that allows them to scale it up quickly to meet growing consumer demand. Often this is done at the cost of efficiency which leads to lower profitability,” he added.

The report concluded that a strong supply chain is key to the growth of India’s online retail industry. The successful implementation of an efficient supply chain would enable the industry to realise its US$ 55-60 billion growth figure by 2020.